Taxble year of X | Ratable shares |
1963 | $100 |
1964 | 150 |
1965 | 1 50 |
1966 | 50 |
1967 | 100 |
Sum | 350 |
1 Deficit.
The amount of the earnings and profits attributable to such block under step 3 is $350.
Taxable year of X | Ratable shares | |||
X | Y | Z | Total | |
1963 | $100 | $40 | $20 | $160 |
1964 | 150 | 40 | -60 | 130 |
1965 | -50 | 30 | 50 | 30 |
1966 | 50 | 50 | 30 | 130 |
1967 | 100 | -40 | 40 | 100 |
Sum | 350 | 120 | 80 | 550 |
The amount of the earnings and profits attributable to such block under step 3 is $550.
Over any deductions allocable to such item under section 882(c). However, if the sale or exchange of stock in the foreign corporation by the U.S. person occurs before January 1, 1967, the provisions of (a) of this subdivision apply with respect to such sale or exchange even though the taxable year begins after December 31, 1966. See section 1248(d)(4). Any item which is required to be excluded from gross income, or which is taxed at a reduced rate, under an applicable treaty obligation of the United States shall not be excluded under this subdivision from earnings and profits accumulated for a taxable year.
Earnings and profits accumulated for taxable year | $10,000 |
Multiplied by: | |
Number of shares in block (30), divided by number of shares outstanding (100) | 30% |
Multiplied by: | |
Number of days in 1964 S held block while F was a controlled foreign corporation (365), divided by number of days in 1964 (365) | 100% |
Tentative ratable share for block | $3,000 |
Earnings and profits accumulated for taxable year | $18,800 | |
Divided by: | ||
Number of shares deemed outstanding each day of 1965: | ||
15 for 73 days (15 * 73/365) | 3 | |
10 for 219 days (10 * 219/365) | 6 | |
85 for 365 days (35 * 365/365) | 85 | |
Total number of shares deemed outstanding each day of 1965 | 94 | |
Earnings and profits accumulated per share | $200 | |
Multiplied by: | ||
Number of days in 1965 T held his share while X was a controlled foreign corporation (73), divided by number of days in 1965 (365) | 20% | |
T's tentative ratable share per share of stock | $40 |
Earnings and profits accumulated per share, determined in example (2) | $200 | |
Multiplied by: | ||
Number of days in 1965 T held X stock while X was a controlled foreign corporation (31), divided by number of days in 1965 (365) | 8.5% | |
Tentative ratable share | $17 |
Example: On December 31, 1975, Brown sells one share of stock in X Corporation, a controlled foreign corporation which has never been a less developed country corporation (as defined in section 902(d)). Both Brown and X use the calendar year as the taxable year. In respect of his share, Brown's tentative ratable share for 1971 (computed under paragraph (c) of this section) is $35. In respect of his share, Brown included $4 in his gross income for 1971 under section 951, and the amount of $3, which was distributed to him by X on January 15, 1972, is excluded from Brown's gross income under section 959(a)(1). In respect of the stock, Brown's ratable share for 1971 is $34, determined as follows:
Tentative ratable share | $35 |
Minus: | |
Excess of amount of tentative ratable share included in Brown's gross income under section 951 ($4), over portion thereof which resulted in exclusion under section 959(a)(1) ($3) | 1 |
Ratable share | 34 |
Example: Assume the same facts as in the example in subparagraph (2)(ii) of this paragraph except that X was a less developed country corporation for 1971. Assume further that Brown satisfies the requirements of paragraph (a) of § 1.1248-5 . Brown's ratable share in respect of the stock for 1971 is zero.
Example: On each day of 1964 and 1965 corporations X and Y are controlled foreign corporations, and each has outstanding 100 shares of one class of stock. On January 15, 1965, T, a United States person, owns one share of stock in X and X directly owns 20 shares of stock in Y. Thus, T owns, within the meaning of section 958(a)(2), stock in Y. On that date, T sells his share in X and satisfies the conditions of paragraph (a)(2) of § 1.1248-1 in respect of his stock in X. Assuming that the conditions of paragraph (a)(2) of § 1.1248-1 would be satisfied by T in respect of the stock he indirectly owns in Y if, on January 15, 1965, he were deemed to have sold such stock in Y, the provisions of this paragraph apply.
(i) Z's earnings and profits for 1969 ($2,000), divided by the number of shares in X deemed outstanding each day of 1969 (100) | $20 | |
Multiplied by: | ||
(ii) Since on each day of 1969 Brown (by reason of owning directly his shares in X) owned, within the meaning of section 958(a)(2), stock in Z while Z was a controlled foreign corporation, the percentage determined under subparagraph (2)(ii) of this paragraph equals | 100% | |
Multiplied by: | ||
(iii) Since on each day of 1969 X owned 100 percent of the stock of Y while Y owned 100 percent of the stock in Z, the percentage determined under subparagraph (2)(iii) of this paragraph equals | 100% | |
Multiplied by: | ||
(iv) Since X and Z each use the same taxable year, the percentage determined under subparagraph (2)(iv) of this paragraph equals | 100% | |
Total | $20 |
(i) The amount determined in subdivision (i) of example (1) | $20 | |
Multiplied by: | ||
(ii) The number of days in the period during 1969 Brown (by reason of owning directly his stock in X) owned, within the meaning of section 958(a)(2), his stock in Z while Z was a controlled foreign corporation (292), divided by the number of days in 1969 (365), equals | 80% | |
Multiplied by: | ||
(iii) The percentage determined in subdivision | ||
(iii) of example (1) | 100% | |
Multiplied by: | ||
(iv) The percentage determined in subdivision | ||
(iv) of example (1) | 100% | |
Total | $16 |
(i) The amount determined in subdivision (i) of example (1) | $20 | |
Multiplied by: | ||
(ii) The percentage determined in subdivision (ii) of example (2) | 80% | |
Multiplied by: | ||
(iii) The average number of shares in Z which were owned (within the meaning of section 958(a)) by X during the applicable period (81), divided by the total number of shares in Z during such period (100) | 81% | |
Multiplied by: | ||
(iv) The percentage determined in subdivision (iv) of example (1) | 100% | |
Total | $12.96 |
The result would be the same if X owned (within the meaning of section 958(a)(2)) 81 percent of the stock in Y while Y so owned 100 percent of the stock in X, or if X so owned 90 percent of the stock in Y while Y so owned 90 percent of the stock in Z.
In respect of Z's taxable year ending | ||
June 30, 1969 | June 30, 1970 | |
(i) Z's earnings and profits, divided by the number of shares in X deemed outstanding on each day of 1969: | ||
$3,000/100 | $30 | |
$2,000/100 | $20 | |
Multiplied by: | ||
(ii) The percentage determined in subdivision (ii) of example (2) | 80% | 80% |
Multiplied by: | ||
(iii) The percentage determined in subdivision (iii) of example (3) | 81% | 81% |
Multiplied by: | ||
(iv) Number of days in Z's taxable year which fall within 1969, divided by total number of days in Z's taxable year: | ||
181/365 | 49.6% | |
184/365 | 50.4% | |
Totals | $9.64 | $6.53 |
(v) Sum of tentative ratable shares of Z attributable to X's 1969 calendar year: | ||
For Z's taxable year ending | ||
June 30, 1969 | $9.64 | |
June 30, 1970 | $6.53 | |
Sum | $16.17 |
Then such person's ratable share (or a deficit in such ratable share) for such taxable year of the lower tier corporation attributable to a taxable year of the first tier corporation (determined without regard to this paragraph) shall be reduced by an amount computed by multiplying such ratable share (so determined without regard to this paragraph) by the percentage computed under either subparagraph (2) or (4) of this paragraph, whichever is applicable.
Example: On January 1, 1967, Brown, a United States person recognizes gain upon the sale of one share of the only class of stock of W Corporation, which he has owned continuously since 1955. He includes a portion of the gain in his gross income as a dividend under section 1248(a). W is the first tier corporation of a chain of foreign corporations W, X, Y, and Z. W and Z each use the calendar year as the taxable year. For 1964, Z was a less developed country corporation and on each day of 1964 Z was a controlled foreign corporation. Additional facts are set forth in the table below:
Corporation-(1) | Shares directly owned by preceding tier- | Column (2) divided by column (3) (percent)-(4) | |
For uninterrupted 10-year period ending Jan. 1, 1967-(2) | On Jan. 1, 1967-(3) | ||
X | 40 | 60 | 662/3 |
Y | 30 | 40 | 75 |
Z | 20 | 30 | 662/3 |
For 1964, the percentage referred to in subparagraph (4) of this paragraph for Z is 331/3 percent (662/3% * 75% * 662/3%).
26 C.F.R. §1.1248-3